, Volume 12, Issue 2-3, pp 113-140

The economics of catastrophes

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Catastrophes can profitably be thought of as economic events. This essay begins by considering the consumption of catastrophes, stressing the way that we disseminate information about them, and respond, possibly on a nonrational basis. Catastrophes are produced through a combination of actions by nature and humans. Due to inappropriate incentives, human actions often exacerbate outcomes. This is particularly true in “micromotive” situations, such as the AIDS epidemic, where actions by many players produce a collectively bad outcome. Mechanisms to prevent or ameliorate catastrophes—liability, insurance, and government regulation—are considered.